**OPTION TRADE NO. 1: Buy the GLD Oct 2012 170.000 call (GLD121020C00170000) at or under $3.15, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $5.50.

**OPTION TRADE NO. 2: Buy the DIA Nov 2012 130.000 put (DIA121117P00130000) at or under $2.15, good for the day. Place a protective stop limit at $0.90 and a pre-determined sell at $4.00.

by Ian Harvey

September 13, 2012

Introduction

Everyone who matters expects the Fed to act this week -- Every player -- Every insider -- Every smart investor.

Case in point, Jan Loeys from JPMorgan (JPM – NYSE) sent the following note around to his top clients:

“…..We think the positive environment for risk assets can and will last over the next 3-6 months. And this is not because of a strong economy, as we foresee below potential global growth over the next year and are below consensus expectations. Overall, we continue to see data that signal that world growth is in a bottoming process. With most countries having now reported, global GDP looks to have expanded at a tepid 1.9% pace in 2Q12, 1.3%-point below what would simply be trend.

On the back of weak gains in consumer and business spending at mid-year, global IP growth has come to a stand-still. And while things appear to have bottomed with some signals of improvement in consumer spending in July, the soft trajectory of both spending and production through June is expected to hold global GDP growth to another tepid quarter of just 2%. More important to us as positive drivers of risk markets are coming policy stimulus measures, price momentum, and the continuing but more medium-term forces of asset reflation and high risk premia…..”

In other words, the fix is in.

In plain English, Loeys doesn’t think the global or U.S. economies look strong.

Nor does he think companies will be particularly profitable.

Rather, he sees us scraping along the bottom. But he just doesn’t care. In fact, that bad news is the very reason he’s telling folks to go long. After all, the primary central banks (the Federal Reserve, the European Central Bank, and the Bank of China) are going to pump in enough new currency over the next six months to float the markets no matter how pathetic the facts on the ground might be.

Last week it looked like an inactive American Fed might just sink the markets (rather than step into the middle of the presidential election).

But then, Mario Draghi and the ECB stepped up and announced an unlimited bond purchasing program – and the markets went berserk. The Dow Jones Industrial 30 (DJIA) rose some 1.84% in less than two hours.

And that was just Europe talking.

Emphasis first on “talking.”

If Draghi succeeds, just how much genuine impact will it have on our companies and our economy? Will Caterpillar sell more tractors in Brussels? Will Dell sell more laptops in Paris? Will McDonald’s sell more burgers in Bonn?

Keep in mind that the U.S. Fed has been doing this exact trick for years now, and the economy is still dead flat. So once again, this upside spike has nothing to do with tangible sales or profits.

Inevitable?

The real implication of the American reaction to the ECB’s announcement is that it has convinced the bulls of the inevitability of a new U.S. liquidity injection program.

• Goldman Sachs (GS – NYSE) has told their clients that the odds are “now above 50% that the Fed will unveil a third round of quantitative easing, or QE3, on Thursday, when the Fed’s two-day policy meeting comes to an end.”

• Barclays analyst Guillermo Felices expects “an extension of the Fed’s low-rate policy into 2015 and a reactivation of open-ended asset purchases, which would include the buying of both U.S. Treasuries and mortgage-backed securities. If it does, we think it would weaken the U.S. dollar and support risk appetite.”

• UBS advises clients that “We now anticipate an announcement of another round of quantitative easing at the FOMC meeting on Sept. 13. The QE3 parameters will likely entail a six-month program of at least $500 billion, primarily focused on buying Treasuries, [and] the Fed will extend its ultra-low rate guidance into 2015.”

Do They Have the Fed Cornered This Time?

It is quite difficult believing that every single smart investor, corporate insider, hedge fund player, and investment banker are all wrong (or all lying) about this.

Individually? This crowd is frequently wrong – and wrong-headed. But, when the whole bunch of them act as a group like this – and the technical analysis confirms that the whole group is putting its money behind this – you can bet that the fix is in.

Note how a 3x Buy Signal Stack reveals that the many investors quietly began to buy up gold simultaneously to their stock purchases back in August?

They know that this whole exercise isn’t about stock profits, but rather a failing dollar. So, they are hedging their bets – just as they did in 2005 and 2008.

After the 2005 signal, the GLD went on to gain 126%.

After 2008, it rewarded investors with eventual gains of some 141%.

We are not talking options here, but rather simple stock purchases. The gains for call options don’t even bear repeating, as you would simply not believe me (after I was done typing out all the zeros).

Case in point, the last ‘Stock Options Made Easy' recommended trade on GLD netted 72% on GLD November 165 Calls.

In my experience, GLD is the best way to play gold. And from a historical perspective, the recent gains are just getting started.

Trade 2

However, level-headiness must come into play after all this excitement.

This is the American Federal Reserve we’re talking about here!

I don’t know how convinced Goldman, UBS, Barclays, et al. are about the Fed’s next move. They could all still be wrong. Or, they could still be running some kind of mammoth scam. It’s certainly happened before.

Bernanke could step up to the podium Thursday afternoon, drink a glass of water, clear his throat, and then ramble on for the next 15 minutes about how the Fed has all the tools it needs – blah! blah! – and then announce that 0% interest rates will be extended an additional year, just as he’s done for the past several meetings.

If that’s all the Fed provides us, the market is going to correct some 2% to 5%, just as it has the past few times everyone was really convinced of a Fed move.